Is the European Debt Crisis Bullish for Gold?

Last week was a turbulent period for precious metals.  On Friday, gold futures for December delivery fell more than $100 to close at $1640, logging its worst percentage drop in five years.  Meanwhile, silver futures dropped $6, its worst single day dollar drop since 1980.  Although the Federal Reserve made headwinds for precious metals by not announcing more quantitative easing last Wednesday, other agencies could have a significant impact on precious metals.

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The IMF released a statement over the weekend that said, “The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our Euro-area colleagues to do what is needed to resolve the euro-area crisis.  We welcome that the IMF stands ready to strongly support this effort as part of its global role.”  Speculation and hopes are building that a massive multi-trillion bailout plan is being prepared to save the Euro zone.  The plan would include a recapitalization of Euro banks via private funds or by the European Financial Stability Facility (EFSF). The EFSF may also be leveraged in order to provide more resources without having to receive approval by national parliaments.  This is similar to the plan Tim Geithner discussed on September 16th in Poland.  ECB board member, Lorenzo Bini Smaghi, explained that monetary officials in Europe have already begun to discuss the next steps to take in solving the debt crisis.  He also said, “We are discussing how to leverage EFSF money efficiently.” The IMF package is expected to quadruple the EFSF bailout fund’s current projected total of 440 billion euros.

Understandably, gold and silver bugs are skeptic of any plan presented by Tim Geithner, the Treasury Secretary of the world’s largest debtor nation.  Furthermore, additional bailouts, QE programs, and leveraged money do not provide a solution to the sovereign debt crisis, it merely prolongs and intensifies the problem.  The UK is also considering ramping up its quantitative easing program as Bank of England policy maker, Ben Broadbent explains, “I can tell you I was reasonably close to voting for more asset purchases, or quantitative easing in September.”

With the sovereign debt crisis still unresolved, several big gold names are looking at the recent pullback as a buying opportunity.  On Monday, gold bull Dr. Marc Faber said, “Gold is quite oversold and I would consider buying some gold in the next two days.”  Famous trends forecaster, Gerald Celente, announced he is “now buying silver for the first time.”  All eyes will remain on Europe as several Euro zone members vote this week on strengthening the EFSF.  Approval from all seventeen members are needed in order to pass the measure. The process is estimated to conclude by mid-October, and only six members have approved the measure so far.

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